Capitals Cost and the Investments Actualisation Rate

Ion Stancu

Theoretical and Applied Economics, 2006, vol. 2(497), issue 2(497), 19-26

Abstract: In this article, the author has assumed himself an assignment somehow ostentatious but useful, we believe, naming the one to illustrate by means of figures, the influence of both leverage and economic growth over the cost of capital, cost which will be used in capital budgeting. This synthesis is meant to be a forthcoming approach to a later investigation of the problems raised by the estimation of the cost of capital in the specific conditions of both the financial market in Romania and the quality of the economic-financial information, information available for this estimation. The discount rate for an investment project (kinv) with a risk equal to the risk undertaken by the enterprise and financed within the firm’s capital structure itself (having the same leverage) is equal to the (weighted average) cost of capital in the respective risk class (k). Under these circumstances, it is interesting to find out this opportunity cost of capital invested in a medium-sized enterprise: a) with investments in rebuilding the productive capacity, all equity financed; b) with investments in rebuilding the productive capacity, financed both by equity and debt; c) with new investments, all equity financed; d) with new investments, financed both by equity and debt. Under these conditions, we estimate the effect of both the leverage and economic growth over the cost of capital (kec and kc) to be able to determine in the end the discount rate of the analyzed investment (kinv): for enterprises with only maintaining investments (g = 0), unlevered (U) and levered (L); for enterprises with growing investments (g > 0), unlevered (U) and levered (L).

Keywords: opportunity cost of capital; expected rate of return; unlevered firm; income stocks; leverage; tax shields; weighted average cost of capital; growth stocks, sustenable growth rate. (search for similar items in EconPapers)
Date: 2006
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